CSj The journal of The Hong Kong Institute of Chartered SecretariesChartered Secretaries.More than meets the eye.October 2014

Asking difficult questionsCGC 2014 review

Directors' delegationInside information Know your Institute

The Business Enablers

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CSJ Oct 2014 (IS).ai 1 22/09/2014 17:11:46

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Creating confidence in your biggest asset

HKICS Ad_210 x 285mm_HK-20140805-6-C1.indd 1 19/08/2014 10:25:24

Date Year 00

Good governance comes with membership About The Hong Kong Institute of Chartered SecretariesThe Hong Kong Institute of Chartered Secretaries (HKICS) is an independent professional body dedicated to the promotion of its members’ role in the formulation and effective implementation of good governance policies in Hong Kong and throughout China, as well as the development of the profession of the Chartered Secretary.The HKICS was first established in 1949 as an association of Hong Kong members of the Institute of Chartered Secretaries and Administrators (ICSA) of London. It became a branch of ICSA in 1990 before gaining local status in 1994, and today has over 5,800 members and 3,200 students.

Council 2014Edith Shih FCIS FCS(PE) – President

Ivan Tam FCIS FCS – Vice-President

Dr Gao Wei FCIS FCS – Vice-President

Bernard Wu FCIS FCS – Treasurer

Dr Eva Chan FCIS FCS(PE)

Susie Cheung FCIS FCS(PE)

Jack Chow FCIS FCS

David Fu FCIS FCS(PE)

Paul Moyes FCIS FCS

Douglas Oxley FCIS FCS

Paul Stafford FCIS FCS

Polly Wong FCIS FCS(PE)April Chan FCIS FCS(PE) – Ex Officio

Committee chairmen 2014Audit Committee: Paul Moyes FCIS FCSEducation Committee: Polly Wong FCIS FCS(PE) Human Resources Committee: April Chan FCIS FCS(PE) Membership Committee: Susie Cheung FCIS FCS(PE) Professional Development Committee:Jack Chow FCIS FCSNomination Committee:Neil McNamara FCIS FCS (Past President)

SecretariatSamantha Suen FCIS FCS(PE) Chief ExecutiveLouisa Lau FCIS FCS(PE) General Manager& Company SecretaryCandy Wong Director, Education and ExaminationsMohan Datwani FCIS FCS, Solicitor and Accredited Mediator, Director, Technical and Research, HKICSCherry Chan Director, MembershipLydia Kan ACIS ACS Director, Professional DevelopmentKenneth Jiang FCIS FCS, BRO Chief RepresentativeKaren Ho Senior Manager, Finance and Accounting

The Hong Kong Institute of Chartered Secretaries(Incorporated in Hong Kong with limited liability by guarantee)3/F, Hong Kong Diamond Exchange Building, 8 Duddell Street, Central, Hong KongTel: (852) 2881 6177 Fax: (852) 2881 5050Email: ask@hkics.org.hk (general) ecpd@hkics.org.hk (Professional Development) member@hkics.org.hk (member) student@hkics.org.hk (student)Website: www.hkics.org.hk

Beijing Representative Office Rm 15A04, 15A/F, Dacheng Tower, No 127 Xuanwumen West StreetXicheng District, Beijing, 100031, ChinaTel: (86) 10 6641 9368 Fax: (86) 10 6641 9078 Email: bro@hkics.org.hk

Institute of Chartered Secretaries and AdministratorsGovernance Institute of AustraliaLevel 10, 5 Hunter Street Sydney, NSW 2000 Australia Tel: (61) 2 9223 5744Fax: (61) 2 9232 7174

Chartered Secretaries Canada202-300 March RoadOttawa, ON, Canada K2K 2E2Tel: (1) 613 595 1151Fax: (1) 613 595 1155

The Malaysian Institute of Chartered Secretaries and AdministratorsNo. 57 The Boulevard Mid Valley City Lingkaran Syed Putra59200 Kuala Lumpur MalaysiaTel: (60) 3 2282 9276Fax: (60) 3 2282 9281

Chartered Secretaries New ZealandPO Box 444Shortland StreetAuckland 1015New Zealand Tel: (64) 9 377 0130Fax: (64) 9 366 3979

The Singapore Association of the Institute of Chartered Secretaries & Administrators149 Rochor Road, #04-07 Fu Lu Shou ComplexSingapore 188425Tel: (65) 6334 4302Fax: (65) 6334 4669

Chartered Secretaries Southern AfricaPO Box 3146Houghton 2041Republic of South AfricaTel: (27) 11 551 4000Fax: (27) 11 551 4027

The Institute of Chartered Secretaries & AdministratorsSaffron House, 6-10 Kirby Street London EC1N 8TSUnited Kingdom Tel: (44) 20 7580 4741Fax: (44) 20 7323 1132

The Institute of Chartered Secretaries & Administrators in ZimbabwePO Box CY172Causeway HarareZimbabweTel: (263) 4 702170Fax: (263) 4 700624

Membership statistics updateAs of 10 September 2014, the Institute’s membership statistics were as follows:Students: 3,297 Graduates: 483Associates: 4,912Fellows: 514

October 2014CSj, the journal of The Hong Kong Institute of Chartered Secretaries, is published 12 times a year by Ninehills Media and is sent to members and students of The Hong Kong Institute of Chartered Secretaries and to certain senior executives in the public and private sectors.

Views expressed are not necessarily the views of The Hong Kong Institute of Chartered Secretaries or Ninehills Media. Any views or comments are for reference only and do not constitute investment or legal advice. No part of this magazine may be reproduced without the permission of the publisher or The Hong Kong Institute of Chartered Secretaries.

Circulation: 9,100Annual subscription: HK$2600 (US$340)To subscribe call: (852) 3796 3060 oremail: enquiries@ninehillsmedia.com

Editorial CommitteeKieran Colvert Mohan Datwani Paul Davis Lydia Kan

CreditsKieran ColvertEditorTerence FungChina EditorEster WensingArt Director

Contributors to this edition Low Chee KeongCUHKMichael DuignanSFC

Advertising sales enquiriesNinehills Media LtdTel: (852) 3796 3060Abid ShaikhEmail: abid@ninehillsmedia.com

Ninehills Media Ltd12/F, Infinitus Plaza199 Des Voeux RoadSheung WanHong KongTel: (852) 3796 3060Fax: (852) 3020 7442Internet: www.ninehillsmedia.comEmail: enquiries@ninehillsmedia.com© Copyright reservedISSN 1023-4128

Ernest LeeLow Chee KeongSamantha SuenXie Bing

Harry HarrisonIllustrator (cover) ImagesiStockphoto

ContentsCover Story CGC 2014 review 08CSj reviews the HKICS Corporate Governance Conference 2014.

In FocusKnow your Institute: fostering talent 18This third article in our 'Know your Institute' series looks at how the HKICS helps students and members acquire the skills they need for a successful career as a Chartered Secretary.

ViewpointDelegation of duties 24Low Chee Keong FCIS FCS, Associate Professor in Corporate Law, The Chinese University of Hong Kong Business School, argues that a recent controversy involving the MTR Corporation Ltd in Hong Kong raises an important issue in corporate law – to what extent can directors delegate to, and rely on, others?

Get the FAQsInside information disclosure 28The Securities and Futures Commission answers technical questions relating to inside information disclosure.

HKICS NewsPresident’s Message 04

Institute News 32

Student News 39

Ask the Expert 07 Your technical questions answered.

Bulletin Board 45 New items and regulatory changes of relevance to members.

Careers 47

October 2014 04

President’s Message

Edith Shih FCIS FCS(PE)

Looking ahead

This year our Institute is celebrating a double anniversary – it is 20 years since the incorporation of the HKICS in Hong Kong and 65 years since the first local association of Chartered Secretaries was set up back in 1949. Our celebrations will culminate later this month with our anniversary cocktails, to be held on 20 October. This event will not only be about the extraordinary journey we have travelled in those 20+65 years, but also about where we are heading.

Our membership numbers have almost doubled since 1994 (from about 3,000 to over 5,800) and our student numbers have been maintained at over 3,000 annually. Back in 1994, our secretariat comprised eight staff members – today we have 30 in Hong Kong and four in Beijing. And we are still growing. Indeed, the potential for growth in student numbers in Mainland China is quite staggering. This growth is redrawing the map of the global corporate secretarial profession. We are moving towards a multipolar world, not only economically and politically, but also professionally.

On 17–19 October, our Institute will be hosting an ICSA International Council meeting in Hong Kong. Representatives of all nine divisions of ICSA and their chief executives will meet here for the third time. Such meetings were previously held here in 2002 and 2006, but this will

be the first meeting to be held in Hong Kong since reforms were made to the ICSA Charter to ensure proportionate representation of the ICSA divisions on International Council. The ICSA has realigned itself as a global organisation, founded and based in the UK, but ready to take up the challenges of promoting the profession globally. This is going to be an important meeting for ICSA as the International Council will discuss and formulate new strategies for the global institute going forward. Our Council is very excited about the visit.

As you might expect, there has been a lot of interest in the development of the profession in Mainland China. After the International Council meeting in Hong Kong, I will be accompanying the ICSA International President, the other Vice-President and other delegates from our Institute to meet with regulators and HKICS affiliated persons, members and students in Shanghai.

This visit will be more than a courtesy call. For the ICSA and HKICS delegates, the visit will be a welcome opportunity to get a better picture of where the profession is at the moment on the Mainland and, more importantly, where it is heading. It will also improve our understanding of the key corporate and regulatory developments in the PRC. But the visit, as ever, will be a two-way exchange. Our Mainland stakeholders are interested in learning about the profession in Hong Kong and globally, and I am sure the visit will help further the understanding of both hosts and guests of the potential for cooperation and joint promotion of good governance and our profession.

This month, then, will be a busy one for our Institute. In addition to the events above,

we will also be convening our annual Convocation. This event, to be held on 18 October, is an opportunity to welcome newly elected members (on this occasion 33 Fellows and 220 Associates) into the profession. Dr PM Kam FCIS FCS, former Chief Executive Officer of the Financial Reporting Council, will be the Guest of Honour at this event which the visiting ICSA Council members will also attend.

I look forward to welcoming our overseas guests from ICSA at the ICSA Council Meeting, congratulating our new Associates and Fellows at the Convocation, as well as meeting our members and other stakeholders at the 20+65 anniversary cocktail reception.

Our other international affiliation, the Corporate Secretaries International Association (CSIA) will be holding its Council Meeting in Sao Paulo, Brazil. On this occasion it will be welcoming its newest affiliate member – the Thai Listed Companies Association, and it aims to establish friendship with corporate secretarial and governance professionals in South America.

I am excited about all these new initiatives and good news. Let’s celebrate together!

October 2014 05

President’s Message

施熙德

展望未來

公會今年適逢雙重誌慶–香港特許

秘書公會在香港成立20周年，也

是自1949年本地特許秘書首次聚會迄今

65周年。10月20日隆重舉行的週年誌慶

酒會將成為公會慶祝活動的高峰。是次

活動不僅回顧公會在這段「20+65」歲

月中的不凡經歷，也會展望公會的未來

發展路向。

公會的會員人數自1994年至今幾乎增

加了一倍（從約3,000人增至目前超過

5,800人），而每年的學員人數也維持

在3,000人以上。回想在1994年時，公

會的秘書處只有八名職員，但現今香港

辦事處的員工共有三十人，而北京則有

四人。我們仍在不斷成長之中。此外，

內地學員人數的增長潛力也不容忽視，

此增長正在重塑公司秘書專業的環球版

圖。我們正邁向一個多極化的世界，這

不限於經濟和政治的範疇內，也見於專

業領域之中。

公會將於10月17-19日籌辦英國特許秘

書及行政人員公會(ICSA)在香港舉行的

國際理事會會議，屆時ICSA所有九個分

部的代表及總裁，將會第三度於本港聚

首一堂。ICSA國際理事會會議曾先後於

2002年和2006年在本港舉行，但是次

會議乃ICSA組織章程修訂（以確保ICSA

國際理事會中的各分部代表人數符合比

例）後在香港舉行的首個會議。ICSA將

其自身重新定位為一個在英國成立及總

部設於當地的全球性組織，積極迎向推

廣環球公司秘書專業的挑戰。是次會議

對ICSA來說十分重要，因為其國際理事

會將會為這個全球性組織的未來路向制

定新策略，而公會也熱切期待是次會議

的來臨。

正如大家可能預料的一樣，中國內地對

這門專業的發展懷著濃厚興趣。當ICSA

國際理事會在香港舉行的會議結束後，

我本人將陪同其國際會長、另一位副會

長和公會其他代表前往上海，與當地監

管機構和香港特許秘書公會的聯席成

員、會員和學員會面。

是次訪問並非單純的禮節性拜訪。對

ICSA及香港特許秘書公會代表來說，是

次訪問將是難得的機會，促進ICSA對內

地公司秘書專業的了解﹔更重要的是了

解這個專業的未來發展，並且有助加深

我們對中國內地主要企業及監管發展的

認識。同時，一如以往，是次訪問是一

個雙向性的交流，中國內地的持份者

(stakeholders)亦希望多了解公司秘書專

業在香港及全球的狀況，而我相信，是

次訪問將有助與所拜訪單位進一步了解

合作，並共同促進良好管治的潛力及我

們的專業。

對公會來說，本月是十分忙碌的月

份，除了上述活動以外，我們並將舉

行公會每年一度的資深會士及會士頒

授儀式。是次頒授儀式將於10月18日

舉行，歡迎新任資深會士及會士（本

屆共有33名資深會士及220名會士）加

入我們專業。財務匯報局前行政總裁

甘博文博士FCIS FCS將會擔任是次活動

的榮譽嘉賓，而到訪的ICSA理事會成員

屆時也將出席。

我萬分期待在ICSA理事會會議上歡迎各

ICSA嘉賓的蒞臨，在資深會士及會士頒

授儀式上向各新任會士及資深會士道

賀，以及在我們的「20+65」週年酒會

上，與會員及其他嘉賓共聚。

我們的另一國際關聯組織「公司秘書國

際聯合會」（CSIA）將會在巴西聖保羅

舉行理事會會議。是次會議將同時歡迎

其最新加入的附屬成員—泰國上市公司

協會，而會議的另一目的是與南美公司

秘書與管治領域的專業人士建立友誼。

這各項新發展和好消息確實令人興奮，

就讓我們一起來慶祝吧！

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OP_Sept_2014_CSJ_ad.pdf 1 24/9/14 ��3:01

Ask the ExpertIf you would like to ask our experts a question, please contact CSj Editor Kieran Colvert: kieran@ninehillsmedia.com

The identity and contact details of questioners will be kept confidential

October 2014 07

A significant amount of work is undertaken by directors in between meetings, typically on an urgent basis, in the

form of approval of circular resolutions and signing of documents. Can these work flows be integrated into our board portal?

Yes, this kind of work can be integrated into a board portal, but only if that portal is purpose-built to facilitate such outside-of-meeting activity with

security and ease of use. Today’s 24×7 business environment has reset expectations

for communication in the workplace, including at the board level. A great deal of board work today takes place between meetings. So, the board portal needs to offer a lot more than passive document sharing to be of any value to directors. It needs to have two-way interactive capabilities that improve decision-making by providing greater efficiency surrounding board meetings, but also to effectively respond to all the work that goes on between.

The portal needs to have a range of productivity tools that can capture the typical process board members are involved in: web conferencing for remote meetings, approvals for green-lighting initiatives or eSigning agreements, and secure email to support the need for one-on-one communication.

Since today’s geographically dispersed board members are attached to their mobile devices, especially their iPads, being able to be productive on the go is key. The board portal needs to have a mobile app that helps directors deliver process continuity from these devices wherever they work, whether in meetings or in between, in the office or on the road. This kind of continuity

not only drives efficiency, but more importantly, it accelerates the process of making decisions, something every board member will value.

Of course, small screens have their limitations and that’s why it’s essential that the board portal’s mobile app have an intuitive user experience that overcomes these limitations, and makes complex information actionable. A strong visual presentation helps the board member locate and absorb the information they need – promptly and efficiently.

It’s common to think of mobility as synonymous with being online, but as business travellers know, network access is spotty on the road. That’s why it’s imperative that the board portal offers not just offline capability, but also a seamless online-offline experience that allows board members to sign off on resolutions even when an internet connection is unavailable. Without this capability coupled with the others mentioned above, the system will not be useful – or find acceptance among boards.

Erin Ruck, Regional DirectorBoardVantageTel: 2108 4600eruck@boardvantage.comwww.boardvantage.com

A:

Q:

Your chance to ask the expert...

The challenges company secretaries face in their work tend to be much broader in scope than those faced by other professionals. Their remit goes from technical areas of corporate administration to providing high-level corporate governance advice to the board. This means that practitioners need to be competent in a wide range of fields.

CSj's ‘Ask the expert’ column is designed with this in mind, providing you with the opportunity to ask our experts questions specific to the challenges you are facing.

If you would like to ask our experts a question simply email CSj Editor Kieran Colvert at: kieran@ninehillsmedia.com.

If you would like information about how your company can join our expert panel then please contact Paul Davis at: paul@ninehillsmedia.com, or telephone: +852 3796 3060.

Please note that the identity and contact details of questioners will be kept confidential.

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OP_Sept_2014_CSJ_ad.pdf 1 24/9/14 ��3:01

October 2014 08

True to form, the latest HKICS corporate governance conference set itself some hard questions to answer. Peter Greenwood FCIS FCS, Conference Chair, and Kieran Colvert, Editor, CSj, take a look at the highlights as well as some of the lighter moments of the day's discussions.

Asking difficult questions: CGC 2014 review

Cover Story

October 2014 09

Cover Story

The Institute's Corporate Governance Conference 2014 lived up to the reputation of its predecessors by delivering a lively, thought-provoking and substantive discussion of current governance issues to an audience of over 330 governance professionals.

In her opening remarks, the Institute's President Edith Shih, explained that the direction of this year's conference was to identify, debate and shed light on a number of specific governance areas characterised by incoming change for which practitioners needed to be fully prepared. 'In the current business environment, the bar is rising for everyone involved in corporate governance – directors, regulators and professional practitioners included,' she said.

The keynote address was delivered by Carlson Tong SBS, JP Chairman of the Securities and Futures Commission (SFC). Carlson generously noted the important role played by the Institute and its members in promoting enhanced governance standards in Hong Kong. Whilst those standards were both good and improving, Carlson warned against complacency. The SFC will continue to play an active role in setting, monitoring and enforcing the standards and best practices of Hong Kong companies to ensure they match the best in the world.

This does not necessarily mean more rules, however. 'A thicker rule-book is not what we need going forward. It is just as important that all company directors and managers have self-discipline and perform their duties properly and professionally,' he said. The SFC will be focusing even more strongly on influencing corporate behaviour, including through a reinforced regime

for statutory disclosure of inside information.

Has regulation gone too far?The first of the conference sessions, 'The long arm of the law', tackled the implications of the widening reach of law and regulation into corporate governance, including the growing trend for national legislation with extra-territorial application. A poll of the audience showed that 91% of conference participants felt that their jobs had become more complicated as a result of new regulations (see 'Poll results – session one' overleaf).

Gilles Hilary, Mubadala Chaired Professor in Corporate Governance and Strategy, INSEAD, explained that, however well-intentioned and well-received, there is an identifiable trend for new legislation to destroy value, increase the complexity of doing business and bring confusion. 'There is confusion even among regulators about what the regulations are saying', he said.

He suggested that social norms, expressing peer pressure and conveyed through social media might provide a valuable and positive influence on

corporate behaviour and this is why getting the right 'tone at the top' is so important for companies. 'We all contribute to social norms but the people at the top have greater influence,' he said. 'They have the gravitas to change people's behaviour.' However, it seems that for the moment, legal rules continue to substitute themselves for social norms, meaning that corporate behaviour is driven by legal compliance rather than companies' own judgements, influenced by those norms, on how they should properly conduct themselves.

In a fast-paced and stimulating address, Anthony Neoh JP, Senior Counsel and former adviser to the China Securities Regulatory Commission, focused on the ongoing and large-scale increase in money supply. He graphically explained the rising complexity of financial products, which are both of limited inherent purpose and close to impossible to understand. This was backed up by a poll which showed that a majority of conference participants believed that boards do not understand all the financial transactions their companies enter into (see 'Poll results – session one' overleaf).

Highlights

• good ethics, rather than complex regulation, remains the foundation of good governance

• company secretaries have an important role to ensure that directors understand the compliance risks associated with Hong Kong's new competition law

• around two-thirds of the conference attendees are not presently reporting on environmental, social and governance (ESG) issues and nearly half regard ESG reporting as a regulatory burden rather than as a part of a risk mitigation strategy

October 2014 10

Cover Story

'Complexity is not coming solely from regulations – financial markets themselves have become more complex. We have seen securitisation upon securitisation upon securitisation,' Mr Neoh said. He added that these trends will increase the urgency for effective dispute resolution procedures to address the disputes to which such instruments will inevitably give rise.

Panellist Anthony Rogers, former Vice-President of the Court of Appeal, continued this theme by observing that financial markets are addicted to debt. 'The root cause of these problems is too much debt, we have become debt junkies,' he said. The solution, however, will not be found in increased regulation since people will always be able to find ways around the rules. He favoured a return to companies being led by management, not appointed 'outsiders', with clear accountability for signing-off the accounts. This suggestion received overwhelming support from conference participants when put to the vote (see 'Poll results – session one' opposite).

Panellist Stephen Brown, Director, Corporate Affairs, Noble Group, and

Deputy Chairman of the Hong Kong Exchanges and Clearing (HKEx) Listing Committee, commented that extra-territorial application of regulations could have quite perverse effects, for example for a prospective CFO to have a US passport would now weigh significantly against his appointment. It is essential to avoid companies being drowned by regulation, especially when that regulation detracts from the easier understanding of businesses – as might well be considered to be the case with mark-to-market accounting.

'I fully agree that more regulation is not the way to go. On the Listing Committee we realise that any listing rule changes have to be thoroughly considered and we would rather go the "comply or explain" route than have an extra 15 pages of regulations,' he said.

Mr Brown also endorsed Mr Neoh's earlier remarks about the need for efficient and transparent markets. Unfortunately, the recent 'regulatory push' is increasingly driving business under the counter. Good ethics, rather than complex regulation, remains the foundation of good governance.

41+59+A

76+24+A

91+2+7+ASince 2007, as a result of new regulations, my job (or work at my firm)

• has become more complicated – 91%

• has become easier – 2%

• has not changed – 7%

• does understand all the major financial transactions it enters into – 41%

• does not understand all those transactions – 59%

• Yes – 76%• No – 24%

I believe the board of the financial institution or issuer I know best

Should the people who run a company be required to present a document that gives a true and fair view of the financial position of the company as at the end of the financial year and gives a true and fair view of the financial performance of the company for the financial year?

A thicker rule-book is not what we need going forward. It is just as important that all company directors and managers have self-discipline and perform their duties properly and professionally.

Carlson Tong SBS, JP, Chairman of the Securities and Futures Commission

Poll results – session one

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October 2014 12

Cover Story

Is Hong Kong ready for its new competition law?Anna Wu, Chairperson, Competition Commission, opened the second session, 'Competing to win', by giving a clear, authoritative and purposeful explanation of the objectives, implementation and timetable for the full application of Hong Kong's new Competition Ordinance.

She confirmed that the Competition Commission hopes to be able to implement the Ordinance by the third quarter of 2015.

She emphasised strongly that companies doing business in Hong Kong must already have started their work of preparation and readiness for the Competition Ordinance. They should not underestimate of the scope, importance, imminence and effective enforcement of Hong Kong's new legislation in this area. She added that the Commission will regard cartel activity as one of the most serious and harmful types of anti-competitive behaviour. One fifth of conference participants answered 'yes' to the question – 'Has your company been involved in cartel activities now or in the past?' (see 'Poll results – session two').

Overseas experience shows that offering immunity or leniency to first reporters of cartel activity is one of the most effective ways of combating this form of anti-competitive practice and Ms Wu confirmed that this will be part of the Competition Commission's armoury. 'Cartels are bad news for any economy.

Any companies involved in cartel activity need to get out now before the commencement of the law. Bear in mind that your business partners may seek immunity and you may face the problem of the unenforceability of contracts.'

A poll led by the Chair of session two, Mark Williams, Professor of Law at the University of Melbourne Law School and founder of the Asian Competition Forum, suggested that around two thirds of the conference attendees believed that the Competition Ordinance will affect their own business (see 'Poll results – session two'). 'A third of you are probably wrong,' he quipped.

Clara Ingen-Housz, a Partner at Linklaters Hong Kong, provided an insight into the significance of anti-trust enforcement on a global and regional basis. She warned of increasing enforcement of competition legislation, including in Asia itself, even if this has not yet reached the scale of the US and EU. One aspect of such enforcement in Asia was that it could be driven by domestic policy considerations, rather than purely legal or regulatory

• No – 80%• Yes – 20%

• Yes – 66%• No – 34%

76+24+A

66+34+A

Has your company been involved in cartel activities now or in the past?'

Do you think that the Competition Ordinance is going to affect your company?

Poll results – session two

Any companies involved in cartel activity need to get out now before the commencement of the [Competition Ordinance]. Bear in mind that your business partners may seek immunity and you may face the problem of the unenforceability of contracts.

Anna Wu GBS, JP, Chairperson, Competition Commission

October 2014 13

Cover Story

Committed to excellence.

factors. 'Competition law is a hot topic at the moment and certainly one that companies need to think about proactively, but competition law is not always clear cut – we specialists sometimes struggle to understand the rules,' she said.

Kala Anandarajah, of Rajah and Tann, provided further insights into Asian practice, including by reference to experience in Singapore. She warned that pre-legislation anti-competitive practices with 'no effective end date' may be punished once the Competition Ordinance comes into operation – reinforcing the need to correct any such practices now, rather than await the law coming into effect.

Stephen Crosswell, Partner, Baker and McKenzie, noted that it could take a significant time for a company to undertake a proper audit of its anti-competitive risks and correct any problems. 'If you are a company secretary you need to get this issue before the board and don't underestimate the time it takes to undertake the audit process and to unwind the risks,' he said.

Is the new regulatory environment a wake-up call for directors?The third conference session, 'Board shoulders, broad shoulders' looked at developments in the role and responsibilities of directors. Ashley Alder JP, CEO of the SFC, discussed the SFC's

tougher approach to enforcement of market rules. One of the SFC's aims is that well-governed companies should hold the view, with confidence, that misconduct by others would be identified and dealt with. He outlined Hong Kong's 'new regulatory architecture' which intends to promote this, using four components:

1. gate keeping (with particular reference to IPOs)

2. statutory backing to disclosure obligations

3. better SFC real-time regulatory oversight, and

October 2014 14

Cover Story

4. a clear and communicated enforcement policy.

Mr Alder noted that corporate governance misconduct cases have tended to be around issues of false financial information, self-enrichment and the disclosure of false information or concealment. 'The ante has been upped,' he said, adding that the SFC will use all the tools available to it to ensure that market rules are enforced. He mentioned in particular that Section 213 of the

Securities and Futures Ordinance is a key enforcement tool for the SFC. 'Hong Kong is an open market with porous borders so it is essential for us to be in a position to provide remedies for the victims of misconduct. This is one of the top goals of what we do,' he said.

Ada Chung JP, Registrar of Companies, briefed the conference on the meaning, implications and significance of Section 465 of the new Companies Ordinance, whose effect she suggested practitioners should take to heart. 'If you can't remember anything else, remember Section 465,' she said.

The introduction of an objective test of directors' duties, acting cumulatively with a subjective test, brings necessary clarity and rigour into the legal yardstick by which the performance of such duties should be measured. Equally, this redefinition brings those duties more into line with modern realities, practices and expectations. Responding to a question from the floor, Ms Chung explained that this revised definition of directors' duties

applies only to companies incorporated in Hong Kong, although practitioners should be aware that corresponding legislation in other jurisdictions might impose similar standards.

During a lively panel discussion, Teresa Ma, Partner, Linklaters, developed the theme of directors' broad shoulders by emphasising that they must not 'slouch' when faced with their responsibilities. Through training, ethical standards and confidence they must be aware of their duties and be prepared to stand firmly by them. Kelvin Wong, Chairman of the Hong Kong Institute of Directors, and Wendy Yung FCIS FCS, Executive Director and Company Secretary of Hysan Development, shared their experiences as directors of listed companies. 'Against the backdrop of the increasingly complex regulatory environment there is clearly a wake-up call for mediocre directors in Hong Kong, but I am optimistic about the future – there are many organisations such as the HKICS promoting higher standards,' said Mr Wong.

Ms Yung was also optimistic about the capacity of Hong Kong directors to understand and fulfill their responsibilities. She noted the underlying differences between executive and non-executive directors and how her own experience with statutory bodies has given her a better understanding of the challenges faced by non-executives and the duty of executive management to support them in the more effective discharge of their role.

Michael Duignan, Senior Director, SFC, discussed the role of the recently established Corporate Regulation

Poll results – session three

29+13+22+36+A• brave – 29%• need the money –

12%• must have an ulterior

motive – 23%• must be connected

to his issuer or major shareholder – 36%

Which description best describes someone accepting any appointment as director of a listed company:

Ashley Alder JP, CEO, Securities and Futures Commission (commenting on the SFC's rigorous enforcement policy)

the ante has been upped

October 2014 15

Cover Story

team, which is an expression of the SFC's increased focus on corporate behaviour. As a relatively recent arrival in Hong Kong, with considerable regulatory experience elsewhere, his initial impressions are that corporate governance in Hong Kong and respect for the regulatory regime are at a reasonable level by international standards, but equally that there is real scope for improvement as demonstrated by well-known cases, which taken together indicated a somewhat 'patchy' overall standard.

Is Hong Kong ready for mandatory ESG reporting?The conference's final session, 'Winds of reporting change' focused on Hong Kong's preparedness for mandatory environmental, social and governance (ESG) reporting. A poll of the audience led by session Chair Professor CK Low, revealed a modest level of current ESG reporting among conference participants, and nearly half regarded ESG reporting as a regulatory burden rather than as a part of a risk mitigation strategy (see 'Poll results – session four' on page 16).

David Graham, Chief Regulatory Officer and Head of Listing at HKEx, provided considerable doubt about the prudence of such a belief. He pointed out that the new Companies Ordinance now requires companies, for financial years beginning on or after 3 March 2014, to include in their directors' reports a discussion of their environmental policies and performance, as well as an account of their relationships with key stakeholders. Moreover, on the basis of an ESG survey carried out earlier this year, HKEx is planning to raise its disclosure obligations to the level of 'comply or explain'.

'Many respondents to our ESG questionnaire said that they were waiting for the recommended best practice to become a code provision. We think it is time to upgrade the current recommended best practice on ESG to a code provision in 2015 or early 2016,' he said. He added, however, that the market will be consulted on this proposed change – the Exchange plans to bring out a consultation paper setting out the proposed changes in early 2015.

John Barnes, Partner, PricewaterhouseCoopers, echoed Mr Graham's remarks on the importance of ESG reporting as not just a future trend, but a present reality for listed companies and others. He explained the importance of a systematic approach to the identification, management and reporting of environmental and social risks. Shortcomings in the effective management and mitigation of ESG risks could have significant adverse impacts on a company's business and profitability.As had been heard earlier, in the context of competition law, a particular theme of Mr Barnes comments was the need for upfront, proactive and systematic steps to adapt to new requirements in ESG disclosure and the time and effort these would require.

Dr Jeanne Ng, Director, Group Sustainability, CLP Power Hong Kong Ltd, offered some of CLP's experience in being an 'early mover' in ESG disclosure. She explained that this had not been merely a question of compliance. Instead, it also reflected an awareness

we think it is time to upgrade the current recommended best practice on ESG to a code provision in 2015 or early 2016

David Graham, Chief Regulatory Officer and Head of Listing, Hong Kong Exchanges and Clearing Ltd

October 2014 16

Cover Story

of growing stakeholder interest in this area, and that if a company did not measure and disclose its own ESG performance honestly and proactively, those stakeholders would assess, even report upon, that performance themselves. 'Social media has become a transformational technology for ESG,' she said. 'Everything you are doing, or not doing, is magnified and that is the risk.'

Some tentative answersIn the limited time available, the conference could not expect to offer an in-depth analysis, still less solutions to the wide-ranging and complex issues discussed. Rather, the goal was to heighten practitioners' awareness of those issues and to start them thinking about how they might affect their companies and their own roles. Nevertheless, the conference did indicate some tentative answers to the questions raised.

It appears from the speakers' own input and audience feedback that Hong Kong's governance professionals are reasonably attuned to the implications of competition law, whereas the response to the advent of mandatory ESG reporting indicated a noticeable degree of unreadiness. The reaction of both speakers' and attendees to the statutory redefinition of directors' duties was positive and informed. On the broad issue of regulation, whilst both corporate behaviour and regulatory compliance might sometimes be 'patchy', Hong Kong's practitioners are managing change reasonably well. Nonetheless, the extent of shortcomings in familiarity with all relevant Securities and Future Ordinance obligations, revealed in the

polling on this point, suggested potential vulnerability to enhanced enforcement by the SFC.

Over the years, the Institute's corporate governance conferences have had a reasonable track record in foreseeing or anticipating incoming trends affecting governance and the corporate secretarial profession. Looking back at past agendas, the conferences have addressed topics such as ESG reporting; the increase in directors' duties; the growing role of independent non-executive directors; the importance of audit committees and risk management; and the advent of corporate governance codes – all before they had fully entered mainstream governance thought and practice.

During this year's conference there was a general consensus that no slowdown in the pace of regulatory change is in sight, and, were such a slowdown to unexpectedly occur, no one contemplated a slowdown in the effectiveness of regulatory enforcement. This presents all corporate governance professionals with a real opportunity; that of developing new skills, enhancing their role within executive management and bringing themselves closer to the heart of corporate decision-making, not just with respect to compliance, but the wider issues of values, ethics, standards and behaviour.

Peter Greenwood FCIS FCS, former Company Secretary and Corporate Counsel of CLP Holdings, and Kieran Colvert, Editor, CSj

The Institute’s ninth biennial corporate governance conference was held on19-20 September in Hong Kong.

37+63+A

44+28+28+A

• Yes – 37%• No – 63%

• a regulatory burden/ obligation – 44.4%

• part of its PR strategy – 28.2%

• part of its risk mitigation strategy – 27.5%

Do you presently report on ESG?

How does your company (or the company you know the best) regard ESG reporting?

Poll results – session four

if you can't remember anything else, remember Section 465

Ada Chung JP, Registrar of Companies, HKSAR (commenting on the new directors' duties requirements of Section 465 of the Companies Ordinance)

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October 2014 18

Know your Institute: fostering talent

October 2014 19

In Focus

This third article in our 'Know your Institute' series looks at how the Hong Kong Institute of Chartered Secretaries, as the membership and qualifying body for Chartered Secretaries in Hong Kong, helps students and members acquire the skills they need for a successful career as a Chartered Secretary.

How does one become a successful company secretary? Firstly, and most obviously, you need to have the technical skills required for the company secretarial function. These include having an excellent knowledge of the legal, regulatory and corporate governance framework within which companies operate, a high level of commercial awareness, and strong analytical and administrative skills.

However, as any experienced company secretary will tell you, the skill set required to take practitioners to the top of the profession includes many other qualities you cannot get from studying the relevant areas of law, corporate governance and administration. Company secretaries need to have excellent interpersonal skills, they need to be highly articulate and have a high level of integrity and personal ethics.

This third article in our 'Know your Institute' series will look at how the education and membership teams at the Institute help students and members acquire the full range of skills they need to progress in their career.

Step one: qualification The IQSThe HKICS sets and conducts the International Qualifying Scheme (IQS) examination which is the primary route for students to qualify as members of the Chartered Secretarial profession. The IQS meets the criteria set by the International Professional Standards Committee of the Institute of Chartered Secretaries

and Administrators (ICSA), the global Chartered Secretarial body, so it represents an international-standard qualifying exam and this is an important badge of quality for aspiring Chartered Secretaries in Hong Kong. This means that members of the HKICS are also automatically qualified as members of the ICSA.

Ensuring that the IQS syllabus remains on target in today's fast-changing regulatory and business environment is the job of the Institute's Education Committee. This team, in particular the IQS Syllabus Rewrite Working Group under the Education Committee, is currently rewriting the syllabus and developing new study packs for its core subjects: Hong Kong corporate law, corporate governance, corporate secretaryship and corporate administration.

Since 2007, the Institute has also been running the IQS examination in Beijing.

It has also developed a PRC IQS syllabus which follows the basic structure of the Hong Kong IQS, but is based on the regulatory and governance environment of the PRC. Moreover, the Institute has developed PRC Corporation Practices modules with HKU SPACE. There are Executive Diplomas in PRC Corporate Governance and PRC Corporate Administration. As of July 2014, there were 145 Mainland students registered with the Institute, and the Institute holds regular information sessions in the Mainland to promote this route into the profession.

'Mainland China will be a potential market for student growth for the HKICS and we expect an increasing number of Mainland students to complete the Chartered Secretarial qualification,' says Polly Wong, Council Member and Chairperson of the Institute's Education Committee. She adds that the profession is increasingly highly regarded and recognised for its

Highlights

• since its incorporation, membership of the HKICS has grown from about 3,000 to over 5,800 and student numbers have been maintained at over 3,000 annually

• since 2007, the Institute has been running the International Qualifying Scheme (IQS) examination in Beijing and expects Mainland China to be an important market for student growth

• the Institute's education and membership teams aim to provide students and members with the knowledge and the personal qualities they will need to acquire to progress in their careers

October 2014 20

In Focus

contribution to corporate governance and sustainability, particularly in Mainland China, and this enhances the career development and employability of the Institute's members.

The collaborative coursesWhile taking the IQS examination is the primary route for students to enter the profession, it is not the only route. The IQS is a graduate entry scheme and is particularly suitable for graduates with degrees in law, finance, accounting, management, corporate administration and corporate governance. As an alternative to completing the Institute’s qualifying scheme, registered students have been able, since 1993, to take one of the post-graduate 'collaborative courses' set up in association with three local universities. These Collaborative Course Agreement (CCA) programmes cover much the same topics and are set at the same level as the IQS, and graduates from these courses are eligible to apply for full exemption from the IQS qualifying examination. About one third of newly registered HKICS students are currently recruited via this route.

The Institute works closely with the universities to ensure that quality and relevance is maintained, says Candy Wong, Director, Education and Examinations. The three CCA courses are reviewed every three years by appointed Review Panels comprising a representative from the Education Committee and a representative from the Institute's Assessment Review Panel. Furthermore, the Institute’s representatives are appointed as external examiners of the programmes for quality assurance purposes.

Candy Wong adds that the number of degree and post-graduate programmes

Committee in Focus: Education Committee

History: The HKICS Education Committee was set up in January 1994 following the establishment of the Institute as an autonomous local professional body. Prior to that, the Advisory Education Sub-Committee and Student Affairs Sub-Committee were responsible for liaison with local tertiary educational institutions and academics as well as Institute registered students. All examination and related matters were subject to the directions given by the ICSA in the UK.

Remit: The Committee:

• sets and administers standards for quality assurance of the IQS and collaborative courses

• sets, monitors and implements studentship development and regulatory policies and support services to students

• promotes the IQS, the Institute and the Chartered Secretarial profession to university students and interested parties

• establishes and maintains contact with relevant academic and professional institutions to prepare students for membership, and

• attends to disciplinary matters and sets, monitors and implements codes of ethics and conduct for students.

The Education Committee is assisted in its work by a number of sub-committees and panels:

• the Exemption Sub-Committee reviews and endorses exemption applications for students and recommends exemption-related policies to the Education Committee

• the Assessment Review Panel ensures the quality and integrity of the IQS examination; reviews the exam structure and syllabus; sets and reviews examination and assessment policies; and reviews marked examination scripts, and

• the Academic Advisory Panel is a platform for the Institute to communicate with representatives of local universities on the development of the Institute’s education matters.

Meetings: Quarterly.

Membership: Polly Wong (Chairman); Ivan Tam (Vice-Chairman); Alberta Sie (Vice-Chairman); David Fu; Winnie Li; Patrick Sung; Jerry Tong; Francis Yuen; Dr Susana Yuen.

October 2014 21

In Focus

more than just record keeping, filing and compliance with the rules. The other side of being a company secretary is the soft skills. We need to have an awareness of the importance of presentation and general etiquette.'

The Institute's membership services have been designed with this in mind – they aim to complement the services provided by the Institute's education and professional development teams. 'Membership sits at the heart of the Institute's work,' says Cherry Chan, Director of the Institute’s Membership Department. 'I work closely with the Chief Executive and Membership Committee in ensuring membership growth and retention, as well as enhancing members’ engagement and benefits.'

The events organised by the membership team usually combine a social networking opportunity with a professional or personal development theme. This applies to large-scale events such as the annual dinner and the annual convocation (where

governance for corporate success, and the development of Hong Kong as a prime financial market locally and globally, the role of the corporate secretarial profession will be increasingly critical in the coming decade for the sustainable development and success of corporations,' she says.

Step two: personal developmentA broader perspectiveAs mentioned at the beginning of this article, technical knowledge is only part of the skill-set company secretaries need to acquire. Susie Cheung, Council Member and Chairperson of the Institute's Membership Committee, believes that the Institute has an important role to play in helping practitioners develop the personal qualities they will need in their career.

'It’s about developing the overall character,' she says, 'that’s what I have been trying to achieve. There is no getting away from the need to have a broader perspective and I think our members should be alert to the fact that the company secretary role now encompasses

in corporate governance in Hong Kong and Mainland China is expanding. 'Due to the increased complexity of regulations, there is a growing demand for governance professionals and the Institute has been lobbying for an increased number of programmes in corporate governance,' she says.

This year the Open University of Hong Kong and Hang Seng Management College each launched a bachelor's degree in this field. Candy Wong has been liaising with Hang Seng Management College and the Open University of Hong Kong on their new 'BBA in Corporate Governance' which was launched in September 2014. In addition, the Institute has developed practical graduate-level workshops within its mandatory CPD programme and will be extending its mandatory CPD requirement to all HKICS Graduates in 2015.

Polly Wong believes that these trends are very positive signs for the corporate secretarial profession. 'With the increase in awareness of the importance of good

there is no getting away from the need to have a broader perspective, I think our members should be alert to the fact that the company secretary role now encompasses more than just record keeping, filings and compliance with the rules

Susie Cheung, HKICS Council Member and Membership Committee Chair

October 2014 22

In Focus

newly elected Fellows and Associates are welcomed into the profession), as well as the diverse range of networking events the membership team organises. A lot of thought goes into choosing the right topic and the right speaker for these events, and the high calibre of speakers the Institute has been able to line up for its membership events has added greatly to their effectiveness and popularity.

Another key consideration has been to target membership events to the very different experience levels of the Institute's membership. A recent innovation has been the establishment of the Young Group, providing networking events for younger members of the Institute. Another relatively recent innovation is the 'Happy Friday for Chartered Secretaries' gatherings. These

Committee in Focus: Membership Committee

History: The HKICS Membership Committee was set up in January 1994 following the establishment of the Institute as an autonomous local professional body. Prior to that, membership admissions were approved by the ICSA Membership Committee in the UK.

Remit: The Committee:

• maintains and improves members’ services and benefits (excluding continuing professional development and publishing)

• sets membership admission policies and maintains standards

for acceptance to membership of Graduates and to Fellowship of Associates

• attends to disciplinary matters and the setting, monitoring and implementation of codes of ethics and conduct for members, and

• facilitates the Affiliated Persons’ Programme and supports networking activities with regulators, government officials and professional institutions in Mainland China.

The Membership Committee is assisted in its work by the Fellowship

enable members to enjoy a relaxed after-work Friday evening with wine and snacks. Guest speakers are invited to share their experience on a diverse range of topics – past events have taken themes such as Chinese ethics and dining etiquette.

'You might ask how relevant these topics are to being a company secretary,' says Susie Cheung, 'but I believe these are part of the "preparatory work". Company secretaries need to deal with the board with confidence, but how do they acquire that confidence? It is only through being exposed to different insights and perspectives that they can grow their confidence and become a more complete person.'

This ethos is also evident in the events targeted at the Institute's senior members

and Fellows. These have included guided tours of art galleries and museums, as well as the recent 'Senior Management/Board Readiness' series of workshops. As the name suggests, these workshops are designed to prepare senior members to take up board and senior management positions. The second workshop in the series took place last month with three speakers: Anthony Neoh FCIS FCS, Senior Counsel & Former Chief Advisor of the China Securities Regulatory Commission; Su-mei Thompson, CEO, The Women’s Foundation, and Founder, the 30% Club Hong Kong; and Robert Knight, Partner, Global CEO & Board of Directors Practice, Heidrick & Struggles, Hong Kong.

The value of mentorshipMentorship has a very long history – for thousands of years apprentices to a

– Promotion and Benefits Group; the Young Group; the Community Service Group; and the Networking Group.

Meetings: Quarterly.

Membership: Susie Cheung (Chairman); Dr Davy Lee (Vice-Chairman); Paul Stafford (Vice-Chairman); Dr Eva Chan; Edmond Chiu; Angie Fung; Nereid Lai; Stella Lo; Gloria Ma; Terry Wan; Ye Yu Mang.

October 2014 23

In Focus

Mainland China will be a potential market for student growth for the HKICS and we expect an increasing number of Mainland students to complete the Chartered Secretarial qualification

Polly Wong, HKICS Council Member and Education Committee Chair

profession or guild have been learning from the masters. As you might expect, mentorship plays an important part in both the Institute's educational and membership services.

On the education side, since 2006 the Institute's 'Student Ambassadors Programme' (SAP) has been bringing together local undergraduates as mentees and Institute’s members as mentors. The SAP also offers a summer internship programme and activities such as seminars, visits to regulators and professional services firms, as well as attending AGMs of listed companies. Over 1,000 students have participated in this programme to date.

Polly Wong believes mentorship is an ideal way for members to get involved in the work of the Institute. 'Members can directly contribute their professional knowledge and skills to the Institute in different aspects including mentorship, student development, professional development, and even strategically developing the Institute as the professional body in Hong Kong, Mainland China and worldwide,' she says.

On the membership side, the Institute is currently devising a formal mentorship programme which hopes to exploit the possibilities of mentorship more widely. Susie Cheung believes the programme will be an excellent way for less experienced members to build up their skills, and she hopes the programme can be up and running by the beginning of next year. The Institute is currently identifying possible mentors from among senior Fellows and associates and considering how to structure the programme. Ms Cheung adds that the Institute will need to prepare both mentors and mentees about their obligations and the benefits they can hope to receive from the programme. She points out that benefits flow both ways – apart from anything else, it helps mentors keep in touch with the mindset of the younger generation.

A bright future?Membership at the HKICS has been growing steadily. Since it was incorporated back in 1994, membership of the Institute has grown from about 3,000 to over 5,800 and student numbers have been maintained at over 3,000

annually. This trend contrasts with the declining membership of some Chartered Secretarial bodies elsewhere. Respondents to this article point out that this growth has a lot to do with the growing demand for compliance and corporate governance professionals in this part of the world, but they add that credit is also due to the way the Institute has been able to pick up on these opportunities.

'I think we are basically establishing ourselves as the guardians of corporate governance,' says Susie Cheung. Going forward, she believes the Institute will continue to grow. 'The future is bright, we are not in a declining industry. On the contrary, there is a greater and more active role for company secretaries to play and how effective we are going to be, and how relevant to society we are going to be, will depend on how much we want to play that role.'

The first two articles in this series can be found in the May and July 2014 editions of CSj. Look out for the next article in the November 2014 edition.

October 2014 24

Viewpoint

Delegation of dutiesLow Chee Keong FCIS FCS, Associate Professor in Corporate Law, The Chinese University of Hong Kong Business School, argues that a recent controversy involving the MTR Corporation Ltd in Hong Kong raises an important issue in corporate law – to what extent can directors delegate to, and rely on, others?

On 15 April 2014, the MTR Corporation Ltd (MTR) announced that its HK$67 billion high-speed railway linking Hong Kong with Guangzhou would be delayed by up to two years due to ‘unforeseen difficulties’. The Secretary for Transport and Housing, Professor Anthony Cheung, had then admitted at being ‘totally caught by surprise’ by the extent of the delay.

He subsequently confessed that he had wanted to inform lawmakers that the rail link might not be ready by the target date of 2015 at a meeting on 22 November 2013 but was persuaded not to do so by Jay Walder, Chief Executive Officer of the MTR, who assured Professor Cheung that the existing schedule remained feasible.

At the Legislative Council Panel on Transport Subcommittee Meeting on 5 May, Mr Walder stated that, despite the exploration of ‘every possible alternative … the obstacles were just too great’. Separately, during an interview with

RTHK Radio, Michael Tien, a legislator and previous Chairman of the KCRC before its merger with the MTR, raised a pertinent question, namely – ‘Did [Mr Walder] ask the necessary questions to check if the team could really deliver the project on time before calling the Transport Minister? If he didn't, then it's serious negligence.’

The foregoing raises an important issue in company law, namely – to what extent can directors delegate their responsibilities and to what extent can they place reliance upon third parties? The crux of the issue goes to the standard

October 2014 25

Viewpoint

Highlights

• with the operational complexities of companies continuing to expand significantly – both technically and geographically – there will inevitably be an increasing degree of reliance on internal and/or external expertise

• although they are allowed to delegate some of their responsibilities, directors are not entitled to rely blindly on advice without applying their minds independently to the facts

• Section 465(2)(b) of the Companies Ordinance requires directors to apply their ‘general knowledge, skill and experience’ to the facts in hand

of care expected of directors which has since 3 March 2014 been codified in Section 465(1) of the Companies Ordinance (Cap 622) as requiring directors to ‘exercise reasonable care, skill and diligence.’ Section 465(2) defines this to mean the care, skill and diligence that would be exercised by a reasonably diligent person with:

i. the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and

ii. the general knowledge, skill and experience that the director has.

Some guidance on this vexed issue may be derived from the decision of the Federal Court of Australia in Australian Securities and Investments Commission v Healey [2011] FCA 717. In a nutshell, the directors were alleged to have breached their duty of care and diligence owed to Centro, the company on which board they serve, by approving consolidated financial accounts that had incorrectly classified A$1.5 billion in debt as ‘non-current liabilities’, as well as failing to disclose the provision of A$1.75 billion in guarantees to an associated company after the balance date. Significantly, both

transactions had been reviewed without query by its Audit Committee as well as by PricewaterhouseCoopers, its external auditor.

In finding the directors liable, Middleton J opined that the ‘importance of the financial statements is one of the fundamental reasons why directors are required to approve them and resolve that they give a true and fair view’. He emphasised that ‘case law indicates that there is a core, irreducible requirement of directors to be involved in the management of the company and to take all reasonable steps to guide and monitor’ and that they have ‘a duty greater than that of simply representing a particular field of experience or expertise’.

Crucially, the judge noted that although ‘a reasonable step would be to delegate various tasks to others … this does not discharge the entire obligation upon directors’, echoing an earlier judicial pronouncement by Lord Wolff in Re Westfield Parking Services Ltd [1998] 2 BCLC 646, that while ‘a proper degree of delegation and division of responsibility is of course permissible, and often necessary, but total abrogation of responsibility is not’.

These views were embraced wholeheartedly by Lord Goldsmith in the Lords Grand Committee during the parliamentary debate on the proposed codification of the duty of directors to exercise independent judgement – now

October 2014 26

Viewpoint

the key consideration for directors must be whether they have – collectively as a board – directed their minds independently to the robustness and accuracy of the periodic reports and/or board papers which were provided to them by the management of the company

section 173 of the English Companies Act 2006 – when Lord Goldsmith opined that: ‘The duty does not prevent a director from relying on the advice or work of others, but the final judgement must be his responsibility. He clearly cannot be expected to do everything himself. Indeed, in certain circumstances directors may be in breach of their duty if they fail to take appropriate advice – for example, legal advice. As with all advice, slavish reliance is not acceptable, and the obtaining of outside advice does not absolve directors from exercising their judgement on the basis of such advice.’

Thus, although they are allowed to delegate some of their responsibilities, directors are not entitled to rely blindly on advice without applying their minds independently to the facts. Indeed this was a key observation by Middleton J in Centro as he took great pains to declare that: ‘Nothing that I decide in this case should indicate that directors are required to have infinite knowledge or ability. Directors are entitled to delegate to others the preparation of books and

accounts and the carrying on of the day-to-day affairs of the company. What each director is expected to do is to take a diligent and intelligent interest in the information available to him or her, to understand that information, and apply an enquiring mind to the responsibilities placed upon him or her.’

Although the decision in Centro revolved principally around the issue of disclosure in financial statements, its application extends much further as Middleton J reviewed the extent to which directors could reasonably rely on advice from third parties. With the operational complexities of companies continuing to expand significantly – both technically and geographically – there will inevitably be an increasing degree of reliance on internal and/or external expertise.

In such circumstances the key consideration for directors must be whether they have – collectively as a board – directed their minds independently to the robustness and accuracy of the periodic reports and/

or board papers which were provided to them by the management of the company. Any failure to do so may render them in breach of section 465(2)(b) of the Companies Ordinance which require that they apply their ‘general knowledge, skill and experience’ to the facts in hand.

Low Chee Keong B.Ec; LL.B (Monash); LL.M (HKU); FCIS FCS

Associate Professor in Corporate Law, The Chinese University of Hong Kong Business School

CK Low chaired session four of the Institute’s Corporate Governance Conference 2014.

The full paper by Low Chee Keong and Low Tak Yip, ‘When is the Board Accountable for Delegation and Reliance? A Case Study of the MTR Corporation' is available for download at http://ssrn.com/abstract=2487710.

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Get the FAQs

October 2014 28

Inside information disclosureIn the second Q&A in our 'Get the FAQs' series, the Securities and Futures Commission answers questions relating to inside information disclosure raised by attendees at this year’s Annual Corporate and Regulatory Update.

Q: For inside information, foresight is necessary but hindsight is 20:20 vision. Do you have any practical advice to help company secretaries to do their jobs and make such judgements?A: The determination of inside information is a matter of judgement given all the available facts and circumstances at the material times. The Securities and Futures Commission (SFC) has produced its Guidelines on Disclosure of Inside Information. These can be found on the SFC website (www.sfc.hk – Regulatory Functions/Listings and Takeovers/Corporate Disclosure).

They provide useful advice and examples that will assist in the process of determining whether the company has inside information. In particular, Paragraph 27 makes it clear that the test of whether the information is likely to affect the price has to be applied as at the time the information was available.

Q: The determination of price-sensitive information is difficult. When should fair value changes proposed by auditors be announced?A: The determination of inside information is a matter of judgement given all the available facts and circumstances. If a

year-end adjustment to the accounts is being proposed by the auditor this may be inside information when it is sufficiently certain to be reflected in the accounts and is of sufficient significance to amount to information that is likely to have a material effect on the price of the company’s securities when made public.

Q: Can you confirm that there is a ‘materiality’ test to be imposed with regard to price-sensitive information disclosures – meaning that one has to consider whether the information is likely to have a ‘material’ impact on the share price? A: Under Section 307B of the Securities and Futures Ordinance, a listed company must disclose inside information to the public as soon as reasonably practicable. Inside information is defined as non-public information that concerns the company, its officers or its securities and if it were made public would have a material effect on the price of its listed securities.

Clearly not every piece of non-public information that concerns the company would have a material effect on the price of its listed securities. It depends a lot on the nature and quality of the information. The cancellation of a single regular supply

contract for a company with many such contracts may not be inside information. If that contract previously produced 50% of yearly sales then it almost certainly would be inside information – even if the sales staff hoped to sign a new contract with another customer shortly.

Useful guidance on the question of how the test of whether information is likely to have a material effect on the price of the listed securities can be found in Paragraph 23 to 29 of the Guidelines on Disclosure of Inside Information.

Q: If a potential connected transaction is going to happen with a connected listed company in the PRC, but no terms or agreement has yet been signed. Does the Hong Kong listed company need to make the announcement in line with the listed company in the PRC?A: If the transaction is inside information for the Hong Kong listed company, then

Get the FAQs

October 2014 29

the obligation to disclose the inside information arises immediately, but it may fall within the safe harbour set out in Section 307D of the Securities and Futures Ordinance. If the information concerns an incomplete proposal or negotiation, then it will fall within the safe harbour on the basis that the company has taken all reasonable precautions for preserving the confidentiality of the information and the confidentiality has been preserved. If the PRC listed company were to make details of the transaction public, then confidentiality would no longer be preserved and so the Hong Kong listed company should make its own announcement as the safe harbour is no longer available.

The question refers to the transaction as being a connected transaction. Various listing rules relate to connected transactions (as defined in the listing rules) and so those rules would need to be considered as well.

Q: Disclosure of pricing policy in detail as required by the Stock Exchange may lead to the leakage of the confidential, commercial tactics of listed issuers to competitors. How should these issues be balanced?A: It would not be usual for the disclosure of detailed pricing strategies to be required on an ongoing basis. Detailed pricing strategies will relatively rarely fall within

the definition of inside information. One of the statutory exemptions from disclosure of inside information set out in Section 307D of the Securities and Futures Ordinance relates to trade secrets and this may be applicable.

In connection with an IPO or further capital raising, the prospectus may be required to include a description of the pricing policies adopted by the company. This would be an important indicator of strategic direction for the company and forms part of the information that investors would need to make an informed decision about whether or not to invest in the shares of the company.

Q: Will the safe harbours in the Securities and Futures Ordinance include the consideration of ‘state secrets’ such as those defined in the PRC?A: The safe harbours are those set out in the legislation (Section 307D of the Securities and Futures Ordinance). Briefly these amount to situations where:

• disclosure of the information is prohibited by Hong Kong laws or court orders

Highlights

• the determination of inside information is a matter of judgement given all the available facts and circumstances at the material times

• the test of whether the information is likely to affect the price has to be applied as at the time the information was available

• useful guidance on the detemination of whether information is likely to have a material effect on the price of the listed securities can be found in Paragraphs 23 to 29 of the SFC’s Guidelines on Disclosure of Inside Information

Get the FAQs

October 2014 30

• the information relates to incomplete negotiations or proposals

• the information relates to trade secrets

• the information relates to liquidity support to banks, and

• disclosure is specifically waived by the SFC.

The SFC will consider waiving disclosure where this would constitute a contravention of a restriction imposed by:

• legislation of a place outside of Hong Kong

• a court order under the law of a place outside of Hong Kong

• a law enforcement agency of a place outside of Hong Kong, and

• a government authority of a place outside of Hong Kong in the exercise of a power conferred by the legislation of that place.

Such waivers may be granted by the SFC after consideration of an application made in writing by the listed company. A restriction of disclosure relating to state

secrets might fall within one of these situations described above.

Q: In relation to the recent ruling which shifts the responsibility on discharging the burden of proof to prove state secrets, how can companies effectively deal with China documents & IPOs?A: On the assumption that the reference is to a recent ruling relating to the case involving Ernst and Young, it is worth noting the comments by Justice Ng who said that the objection by Ernst and Young against producing the audit working papers based on state secrets is ‘a complete red herring’.

As Ashley Alder, the SFC’s Chief Executive Officer, said, ‘This case is primarily about the obligations of an accounting firm in Hong Kong to comply with requirements under Hong Kong law. The case is not about PRC law. Auditors should not withhold information that is in their possession and sought by the SFC in connection with suspected misconduct in Hong Kong’s markets’.

It would therefore be incorrect to say that, as a result of that case, the burden of proof has shifted. If information is judged to be a state secret under the state secrecy law operating in the PRC, this is likely to fall within one of the specific exemptions

set out in Section 307D of the Securities and Futures Ordinance.

Q: Can the SFC publish the relevant sanctions for breaching the inside information provisions of the Securities and Futures Ordinance? These are currently difficult to find.A: A list of civil sanctions that may be imposed by the Market Misconduct Tribunal for breaching disclosure requirements are set out in section 307N of the Securities and Futures Ordinance. They are:

• a qualification order on an officer from being a director, manager or

The cancellation of a single, regular supply contract for a company with many such contracts may not be inside information. If that contract previously produced 50% of yearly sales then it almost certainly would be inside information.

Further guidance

The SFC’s Guidelines on Disclosure of Inside Information are available on the SFC website (www.sfc.hk – Regulatory Functions/Listings and Takeovers/Corporate Disclosure). The SFC also provides a consultation service to the market with a view to assist listed corporations in understanding and complying with statutory disclosure provisions. Consultations generally take the form of verbal discussions. The views expressed by the SFC are preliminary and non-binding in nature.

The contact details are: Tel: (852) 2231 1009; Fax: (852) 2810 5385; Email: cfmailbox@sfc.hk; Address: Corporate Disclosure Team, Corporate Finance Division, Securities and Futures Commission, 35/F, Cheung Kong Centre, 2 Queen's Road Central, Hong Kong.

Get the FAQs

October 2014 31

• an order for an officer to undergo training.

A list of enforcement actions taken by the SFC can be found on our website (www.sfc.hk – News and Announcements/News/Enforcement News).

Many thanks to Michael Duignan, Senior Director, Corporate Finance, SFC, for his help in preparing this Q&A. Further information can be found in the SFC’s new Corporate Regulation Newsletter which can be accessed from a new link on the HKICS homepage (www.hkics.org.hk).

otherwise involved in the management of a listed company for up to five years

• a ‘cold shoulder’ order on a listed company or an officer for up to five years

• a ‘cease or desist’ order on a listed company or an officer

• a fine on a listed company or a director or chief executive up to HK$8 million

• payment of costs to the government in relation to the proceedings

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• payment of costs to the SFC in relation to the investigation or proceedings

• an order for a body of which an officer is a member to be recommended to take disciplinary action against the officer

• an order for a listed company to appoint an independent professional adviser to review the company’s compliance procedures or to advise the company on compliance matters, and

October 2014 32

Institute News

Seminars: August to September 2014

21 August The new Companies Ordinance – application issues about financial reporting that company secretaries need to know

Chair: Susan Lo FCIS FCS, Executive Director, Director of Corporate Services and Head of Learning & Development, Tricor Services Ltd

Speaker: Ernest Lee FCIS FCS, Partner, Assurance, Professional Practice, Ernst & Young

15 August The new Companies Ordinance – directors' and officers' responsibility and accountability under the new regime

Chair: Eric Chan FCIS FCS(PE), Chief Consultant, Reachtop Consulting LtdSpeaker: Paul Kwan, Partner, Deacons

29 August The new Companies Ordinance – all that you need to know about rights of shareholders under the new company law regime

Chair: Edmond Chiu ACIS ACS, Director of Corporate Services, Vistra Hong Kong

Speaker: Paul Kwan, Partner, Deacons

12 August How to plan for ESG reporting

Chair: Sally Chan FCIS FCS, Assistant Company Secretary, CLP Holdings Ltd

Speaker: Ir Albert Lai, CEO, Carbon Care Asia and former Member, Multi-stakeholder, Council of Global Reporting Initiative (GRI)

Membership application deadlines

Members and Graduates are encouraged to advance their membership status once they have obtained sufficient relevant working experience. Fellowship and Associateship applications will be approved by the Membership Committee on a regular basis, subject to receipt of all necessary application and supporting documentation and fulfilling all the criteria. If you plan to apply, please note the last submission deadline and approval date in 2014 is Wednesday 12 November 2014 and Thursday 11 December 2014 respectively.

For enquiries, please contact Ken Lai at: 2830 6016, or Jonathan Chow at: 2830 6088, or email: member@hkics.org.hk.

October 2014 33

Institute News

1 September Joint seminar with the Security Bureau – anti-money laundering seminar for designated non-financial businesses and professionsSpeakers: Winki Lam, Assistant Secretary for Security, Narcotics Division, Security Bureau; Chow Wai-tong, Senior Inspector, Financial Intelligence Coordination Unit, Hong Kong Customs & Excise Department; Natalia Seng FCIS FCS, Past President, HKICS and Chief Executive Officer – China & Hong Kong, Tricor Group/Tricor Services Ltd

5 September The new Companies Ordinance – enforcement of contract, formality and execution

Chair: Dr Davy Lee FCIS FCS, Group Company Secretary, Lippo Group

Speaker: Paul Kwan, Partner, Deacons

3 September Directors and officers: legal liabilities, insurance and recent trends

Chair: Mohan Datwani FCIS FCS, Solicitor and Accredited Mediator, and Director, Technical and Research, HKICS

Speakers: Richard Garside, S